My Comments: A tragedy for whom, you might ask.
I interpret this to mean everyone with money invested who cannot afford to lose a bunch of it. And especially those no longer working, whose ability to survive financially is dependent on money invested in retirement accounts.
Yes, I know, I’ve been telling this tale now for years, and every time I post something that suggests the sky is falling, the stock market records a new high. I’ve even been thinking about changing my mind and putting some of my money into a more aggressive posture.
And then I find an article like this one, and I say to myself, “Self, pay attention and stay very, very cautious.” And as the author Sven Henrich says, “…global markets, central banks, politics, the economy, the business cycle and technicals are all converging in 2019 for a toxic combination that may result in combustion.”
Sven Henrich \ April 11, 2019
In the U.S. stock market, it’s all going to end badly. Even some ardent bulls will freely admit to it. The question is how, when and where.
Frankly, a tragedy is unfolding, and discerning eyes can see it. Since the December lows, the stock market has taken the scripted route higher, salivating at the prospect of dovish central bankers once again levitating asset prices higher. It’s a Pavlovian response learned over the past 10 years. Record corporate buybacks keep flushing through the market, and cheap-money days are here again as yields have dropped markedly since their peak last fall.
But investors may sooner or later learn the hard way that this sudden capitulation by central bankers is not a positive sign, but rather a sign of desperation. The fact is, central banks are hopelessly trapped.
The capitulation is as complete as it is global, and 10 years after the financial crisis, there is not a single central bank on the planet that has an exit plan. As this week’s Federal Reserve minutes again highlighted: No interest-rate increases in 2019 while the tech sector is making a new all-time high. What an absurdity — a slowing economy ignored by the market as cheap money dominates.
So great is the fear of falling markets and a slowing economy that the grand central bank experiment has ended in utter failure. But at least the Fed tried for a little bit before capitulating. The enormity of the central bank failure is perhaps best encapsulated by the state of the European Central Bank (ECB) under President Mario Draghi:
(note: the original article includes two graphs here along with comments by the author on Twitter…)
Yet, in their desperation, central banks may have set a combustion process in motion that they can’t stop, one that may bring about even more ghastly consequences than the market troubles they sought to avert in the first place.
It’s a blow-off topping scenario driven by several factors: All-in dovish central banks, a renewed desperate hunt for yield, FOMO, a U.S.-China trade deal, record buybacks, trillion-dollar deficits ($1.1 trillion for 2019, to be exact, and rising) and a White House administration preoccupied with managing stock market levels with the expressed goal to keep prices elevated for the 2020 U.S. election.
Trump’s dangerous game
The latter point is not lost on Wall Street. This is from Morgan Stanley’s chief global strategist of investment management: Trump’s dangerous obsession with the markets.
“Mr. Trump’s willingness to bend policy to please the markets is now clear — and it’s risky. In recent years, the stock markets have grown larger than the economy, and they are now big enough to take the economy down with them when they deflate.” (My emphasis.)
And that is the underlying motivation of it all: Prevent any lasting damage to equity markets to minimize the impact on the economy. Central bankers know this. Hence, they always intervene when things get hairy:And this is how you end up with the loosest financial conditions in 25 years, 3.8% unemployment and a Fed too scared to raise rates with the lowest fed funds rate on record during, and while on, the verge of the longest economic expansion cycle in history. Well done.
The steepness and relentless nature of this rally has left many people confounded, even though it is not inconsistent with the concept of a bear market rally. I’ve written extensively about this.
But because so many people and funds are left behind, the case can be made that a psychological capitulation could add further fuel to the fire.